By Luo Xuan

Has the Chinese economy hit its low point at 6.4% growth?

April 23, 2019

China's GDP rose 6.4 percent in the first quarter, matching the fourth quarter of last year. The market has reached the bottom earlier than expected in the beginning of 2019, and the economy also has hit its low point. However, in both the long and short run, the economic revival has been lackluster.

In the long run, after a 40-year growth miracle, the Chinese economy remains far from finishing its task of shifting gears. Only eight out of 180 economies worldwide have achieved a 30-year-straight high growth miracle. Besides China, the other seven economies ended their high growth period within 40 years. Some have fallen into ultra-low growth or ended up in recessions. 

Sharp economic slowdown happened in Japan, which failed to transform its economy. Since the bubbles in the stock market and real estate broke in the early 1990s, Japan's GDP growth has hardly passed 3 percent, and even dipped below zero in some periods. The country got caught in its "lost three decades," with GDP growth in 2018 under one percent.South Korea is one typical example of a smooth slowdown. Its GDP growth has been below 5 percent since 2003 and stabilized at around 3 percent over the past seven years.

China will be no exception. Since its GDP sunk below 7 percent in 2015, it will be difficult to get back that speed. Even the stimulus package only let it bounce back to 6.9 percent. One key variable is that the population dividend has been phasing out. Since the size of the Chinese labor force first showed a decline in 2012, the number of workers has decreased for seven consecutive years by an average of three to four million annually. The employed population in 2018 saw a decline and the trend is expected to continue. The Chinese population is also aging. Seniors above 60 years old number 250 million and that number will be 480 million in 2050.

An aging population will result in a systemic decline in the economy's potential growth capability. There are two direct implications for the economy.First, population aging has pushed up labor costs and led manufacturing to shift out of the country. A Deloitte report showed that China's labor costs had soared fivefold over the 10 years since 2005 and 15-fold since 1995, indicative of a drastic surge in the cost of labor. Currently, Vietnamese workers' average pay has yet to reach half of what their Chinese counterparts make on average. Rising labor costs surely have seen many big global factories moving out of the country. 

China has been going through a deep shift over recent years, with many factories shifting toward Southeast Asia. "Made in China" is stealthily becoming "Made in Myanmar" and "Made in Vietnam." For example, Swedish clothing retailer H&M has moved its garment manufacturing facilities from China to Myanmar, while Microsoft has relocated Nokia smartphone production from China to Vietnam, and Samsung has also moved its China factories to Vietnam. 

Second, an aging population has weighed on the inelastic demand for housing, thereby eroding the potential of the housing sector as a growth driver. Apart from a decrease in the amount of labor, the numbers of high school graduates and newly registered marriages have also been on a downward spiral since 2013. A trend of falling inelastic demand for housing has followed as a result.

International experience has shown that peaks in the working population nearly coincide with peaks in home prices. For instance, the U.S. labor force reached its peak in 2007 while home prices hit the ceiling in 2006. Japan's labor force peaked in 1992, while the nation's home prices were at their peak in 1990. The fading demographic dividend and weak growth momentum for homes suggest the fundamentals of the housing market have changed dramatically. The golden era of an overall expansion has come to an end, which has been replaced by the silver era of structural optimization. For example, there has been a trend of the economy shaking its dependence on the housing sector.

Over the short term, the economy is indeed seeing signs of stabilization, essentially driven by the steadying of social financing. This indicates an expansion of credit in the real economy, while a rebound in the Manufacturing Purchasing Managers' Index (PMI) is merely an outcome. If the economy's short-term prospects are judged from a long-term point of view, the first quarter GDP growth - unchanged from the previous quarter's 6.4 percent - clearly indicates a brief respite amid a larger economic cycle of deceleration. History shows that over the course of a short-term policy-enabled economic uptick amid a larger cycle, the pace, continuation and extent of economic stabilization tend to be weak, especially as time elapses.

Compared with the last cycle in 2015, the current round of economic stabilization is expected to be weaker, more mercurial and short-lived. The larger population cycle will also turn out to be a bigger drag on growth.

(Source: global times) 

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